A Super Tax Hike Spells Disaster

It would be a great tragedy if a super tax hike came out of a supercommittee compromise deal. It would do great harm to the economy -- just as much harm as President Obama's various tax-hike threats. And on the Republican side, a super tax hike would irreparably split the GOP.

OK. Here's the good news. In a CNBC interview this week, I asked supercommittee co-chair Jeb Hensarling about an idea from the Democrats to raise taxes by $600 billion to $800 billion. About $300 billion of that might be upfront, with $500 billion later from some tax-reform overhaul. This would be an unmitigated economic disaster.

But Hensarling was blunt: "Not going to happen, Larry." He said no such deal has been presented to him. And if it were, he and other Republicans on the supercommittee would not support it.

Hensarling then added, "We put $250 billion of what is known as static revenue on the table, but only if we can bring down rates. We believe we can bring the top individual rate down to 28, 29, maybe at most 30 percent, and bring the corporate rate down to the median of the EU, 25 percent." For emphasis, he said, "We have gone as far as we feel we can go."

The Texan was referring to the Sen. Pat Toomey plan, which would lower the personal tax rate to 28 percent and head down from there, while at the same time putting limits on personal deductions (such as mortgage interest) for upper-income taxpayers. In other words, flatten the rates and broaden the base.

Net revenues would go up in this scheme for two reasons: First, the reduction in personal tax breaks; second, the economic-growth impact would be positive. This calls on the research of Harvard professor Martin Feldstein, who urged Congress to trade off lower rates with fewer deductions since the (SET ITAL) incentive (END ITAL) effect of taking home more after-tax income would benefit the economy.

Trouble is, Democrats don't buy into it -- at least not yet. Senate supercommittee members Patty Murray and John Kerry have opposed real tax reform. And it has been reported that House supercommittee member Xavier Becerra opposes it (although Chris van Hollen might be looking at it).

But the whole trouble with the machinations of the two sides in this deficit-cutting episode is that the closer you get to the Nov. 23 deadline, the more compromises are made. Democrats are pulling hard for higher tax (SET ITAL) rates, (END ITAL) which would damage the economy, while Republicans are making no progress getting any meaningful health care entitlement reform.

And the GOP is in danger of losing the narrative. Most of the noise is coming from Democratic proposals for higher taxes, while Republicans have not taken any entitlement-spending-cut scalps.